• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Equilibrium national income

D

divyam sankharva

Member
In chap 17 it is mentioned that equlilibrium national income is the level at which injections is equal to withdrawals , and later in the chapter it is also mentioned that equilibrium national income is the level at which aggregate demand is equal to supply, so are these two points equal and if yes then how they both are equal?
 
Is it because in AD-AS model , at all points in AD curve withdrawals is equal to injections , as at higher price and lower gdp mpc is less than mpc when prices are low and gdp is high thus overall withdrawals are same as injections?
 
Hi Divyam

Apologies for the delay in reply, I’m away teaching at present.

Yes, assuming both models are accurate, I would expect the equilibrium level of national income to be the same in each model.

In the circular flow of income model, when national income is at it’s equilibrium level we would expect aggregate demand (AD, or planned expenditure (E)) to be equal to national output (or income). Money is just flowing round and round the economy.

Similarly, in the AD-AS model, the equilibrium national income and price level occurs where aggregate demand (AD) equals Aggregate Supply (AS), where AS is the total level of output in the economy.

Why, according to the circular flow of income, will planned injections equal planned withdrawals when we are at the equilibrium level of national income? Well consider the situation where there is a rise in injections into the economy, perhaps because of an increase in government spending. This is an increase in aggregate demand and so firms produce and sell more of their goods ie there is an increase in output. In turn these firms pay higher wages, dividends etc and national income rises. But as households’ incomes rise, so will withdrawals because not only do households spend more on domestically produced goods, they also save more, pay more tax and spend more on imports. Those withdrawals carry on rising until they are equal to the injections and the economy is in equilibrium again.

Best wishes

Gresham
 
Last edited:
You must log in or register to reply here.
Back
Top